The AED tax type should be changed: experts

• Banks risk higher taxes under revised ADR formula.
• Year-end ADR may shift to annual average calculation.
• Exemption of certain advances could increase banks’ tax liabilities.

Analysts said on Monday that the committee set up by Prime Minister Shahbaz Sharif is likely to adjust the formula for imposing additional taxes on low advance-to-deposit ratios (ADRs).

Instead of using the end-of-use number on December 31, 2024, The News The calculation may reportedly change to an annual average – a move analysts say could bring more balance and fairness.

There is a possibility that the State Bank of Pakistan (SBP) may introduce a revised formula for calculating ADR excluding certain advances and including all deposits in the calculation.

These changes are expected as the government steps up its efforts to increase tax collection by banks based on income from government securities.

Last week, the prime minister set up a committee to deal with the issue of ADR, which will be headed by Deputy Prime Minister Ishaq Dar.

The committee is expected to submit its report within a week and will also recommend any necessary legal amendments and regulatory changes to the legislation.

Banks are currently required to achieve a gross solvency target of 50% by the end of the year to avoid additional taxes on government securities income.

According to SBP data, the banking sector had already reached ADR of 47% by November 15, from 40% recorded on June 28.

If banks maintain ADR between 40% and 50%, they will face an additional tax of 10%. If the ADR falls below 40%, they will be subject to a higher additional tax of 16% on their government securities income.

“Yes, the formula could also change to an average, which can reduce the ADR significantly,” said Awais Ashraf, director of research at AKD Securities Limited.

“Banks have parked advances to non-banking financial institutions (NBFIs) to comply with the solvency criteria set by the government. However, if the government does not exclude these advances from the bank’s calculation, this is a material negative for profitability of the banking sector.” Ashraf added.

In 2008, the SBP, through a circular, revised the definition of ‘Advances’ and ‘Deposits’ for the calculation of ADR, where the SBP excluded certain advances and included all deposits for the calculation, Topline Securities said in a note.

“This time, we cannot rule out the possibility of SBP introducing a similar formula, excluding lending to non-NBFIs, etc., which could lead to lower ADR and lead to banks paying higher taxes” , he said. .

The committee may change the formula for additional tax for low ADR from “year end i.e. the particular date of December 31, 2024” to “average for the year”, he added.

The report estimates that any measure targeting Rs 100 billion in additional tax revenue from banks could weigh on bank profitability by 12-15%.

In the nine months of 2024, the listed banks’ pre-tax profits stood at Rs 913 billion, with full-year profits expected to be around Rs 1,200 billion, the report said.

About 80% (Rs 960 billion) of this profit comes from government securities. If the ADR of all banks remains in the range of 40%-50%, the government could collect an additional tax of 10%, i.e. Rs 96 billion.

However, if the ADR of all banks falls below 40%, the government could collect an additional tax of 16%, amounting to 154 billion rupees.

Saad Hanif, head of research at Ismail Iqbal Securities, said the SBP may exclude certain categories of loans, such as loans to non-NBFIs, or make other adjustments.

“Such changes are likely aimed at widening the tax base for banks with low ADRs, potentially increasing their tax burden. This is in line with the government’s intention to generate additional revenue from the banking sector,” Hanif added.

“However, the exact formula will depend on the committee’s recommendations and SBP’s policy objectives,” he said.